How to Improve Business Cash Flow 

Cash flow is one area where even successful businesses can find themselves in trouble. However, by implementing effective business cash flow management strategies, you can avoid such situations. It’s not unusual for a business to have solid sales and growth yet run into an unexpected situation where it simply lacks the cash to meet operational needs. 

When this happens, it’s a problem with a business’s cash flow management strategy, not necessarily a problem with the underlying business. This illustrates how important cash flow management is to your business and how it can benefit it.

As businesses continue to struggle with the recent record inflationary pressures and their impact, cash flow is an even more significant concern. Even if your business’s cash flow management worked previously, it may need a few strategic tweaks to adjust to the current inflationary trends.

To help you maintain cash flow, we’ll cover some key areas for Business Cash Flow Improvement and show you how to use analytics and metrics to spot trouble before you find yourself without enough reserves.

The Basics Of Business Cash Flow Analysis

Cash flow represents the measure of funds coming into and out of your business over a set period. Typically, it is documented in a standard financial statement, profit and loss statements, and other similar overviews of your business health.

Cash flow statements for small businesses are sometimes less detailed than those for larger corporations. However, every statement should include a breakdown of your overall cash flow into three main categories.

Operational

Cash flow from operating activities includes cash moving in and out from standard business operations, such as sales or accounts receivable. Your business accounts payable will include cash outflows, payroll expenses, and other similar operational costs in this section. Your tax liability is also included in this section of your statement of cash flows.

Investing

Cash flows from investing deals with cash, either inflows or outflows related to investment activities. For example, the purchase of land or other assets is included in this section. This is true whether they produce cash inflows or outflows. Also, the sale of securities that generate cash is included in this section.

Financing 

Cash flow from financing activities includes debt, equity, and dividends. For example, dividend payments, stock buybacks, and bond sales will be entries in this section of the statement of cash flows.

Analyzing Business Cash Flow

Once you’ve categorized your cash flow into the main categories above, you should have a statement that gives you your ending balance or net change to your cash account. However, this final figure doesn’t always tell the whole story for every business. 

Your business is unique, and no set number, ratio, or percentage is perfect. However, conducting a comprehensive cash flow analysis will give you a deeper understanding of your business’s financial health. This knowledge can then give you the confidence you need to make more informed decisions.

To start, it’s a good idea to carefully examine your statement and see where money flows in and out. You want to find areas you didn’t realize were abnormal or slipped from your intended business goals.

If you’re just beginning to closely examine your cash flows due to financial problems, this is where you will likely encounter outflows you didn’t realize were becoming such a drain. This is more of an overview analysis designed to give you a snapshot of your current cash flow.

To dig deeper, you conduct a detailed analysis comparing specific aspects of your cash flow statement using the metrics below.

Operating Cash Flow

This financial metric mainly gauges a business’s overall financial health and efficiency. Operating cash flow is also related to a business’s liquidity ratio analysis. It measures the proportion of cash generated through core business operations relative to net sales revenue.

Operations/Net Sales Ratio

Dividing your operating cash flow by net sales will yield the operating cash flow to net sales ratio. Your operating number comes from your cash flow statement, and your net sales figure comes from your income statement.

There is no perfect ratio, but in general, the higher the ratio, the healthier the business is. However, it’s better to judge this number by industry-wide standards and businesses in the same growth stage as your business.

For example, aggressive growth and expansion strategies usually result in lower ratios. However, this is anticipated and may not indicate a problem if it’s an accepted part of a long-term strategy toward profitability in the future.

Another way to use this ratio is to measure it over time instead of simply using a snapshot at any moment. Measuring this ratio over time can indicate where problems started for your cash flow. It’s possible you tried to expand too quickly or made too many investments that your sales couldn’t support.

Finally, you want to track how your cash flow increases as your sales increase. For overall financial health, these figures should have a positive correlation. If sales are positive but cash flow is flat or negative, that’s a sign of a possible problem.

Free Cash Flow (FCF)

Simply put, this metric shows the amount of cash a business has left over after paying its operating expenses and capital expenditures. FCF gives you insight into how efficient your business is at generating cash. This metric is important because it shows how much cash the business has on hand to invest in growth or scaling opportunities and pay unexpected expenses.

The lower the FCF, the more the business will have to rely on financing or other means of funding. Similar to other cash flow metrics, negative numbers do not always indicate a problem. During high-growth phases, this is common as part of a business plan.

However, these periods must be part of an overall strategy, and the metrics must still be tracked to ensure they align with projections. To determine your FCF, you simply subtract your capital expenditures (CapEx) from your operating cash flow.

Adding figures beyond your capital expenditures for specific businesses and industries is sometimes useful. This can be useful for expenses that are difficult or impossible to reduce, such as dividends.

Cash Flow Analysis Tools

Another option for identifying cash flow problems is to use analysis tools. Many tools are included in your accounting software, but third-party tools are also available.

These tools are helpful for effective cash flow forecasting. Other options include cash flow planning software to develop a strategy before seasonal cash flow adjustments or launching a business.

Cash Flow Improvement Strategies

Now that you better understand cash flow and its analysis, it’s time to put that knowledge into action. Managing your cash flow effectively is often easier said than done, but don’t worry-we’ve got you covered. In the following sections, we’ll share some real-life cash flow management techniques that can significantly improve your cash flow without requiring extensive investments or long time frames.

Accelerating Receivables Collection

This one may sound obvious, but it’s often overlooked by businesses that haven’t overhauled or modernized their overall invoicing and payment workflow. With today’s digital payment services and other tools, many businesses can get paid much faster than they currently are.

Getting paid faster will result in immediate positive cash flow improvements as the time between payment and your related operating costs becomes shorter. One way to do this is to ensure you are using integrated payments whenever possible. Integrated payments are tools and methods that allow you to integrate your payment processing systems with your other business tools, such as accounting software or invoicing systems. 

Other options are fully electronic invoices with direct payment links so customers can pay them immediately through a custom link to a dedicated payment page. These integration tools help you send invoices faster and receive payments faster with less overhead and costs.

Furthermore, integration can help you automate the recovery of unpaid invoices that are past their due dates. These past-due invoices are a significant drain on cash flow. Automation using payment integrations will track invoices and send all your late requests along with payment links so customers can get up to date.

Even a small improvement in payment speed and late invoices can significantly benefit your cash flow metrics. As a benefit, better invoice tracking and management help improve sales forecasting. Accurately forecasting sales and income helps your cash flow management in the long run.

Consider Leasing Over Purchases

For many small business owners, leasing seems like a bad investment. You pay more over time than simply purchasing the equipment or land. While this is true for the long term and in certain scenarios, it’s not the best option if maximizing cash flow is your current goal. Leases can provide stable and predictable payments that don’t require you to access your working capital or take on debt with variable interest rates.

In today’s environment, technology is changing rapidly, and many businesses can find efficiencies and improvements by upgrading specific equipment related to their business. Leasing allows businesses to obtain these cost-saving items while still predictably maintaining their overall cash flow.

There are also options through business leasing companies where you can bundle old equipment or new equipment into single leasing arrangements. This can free up cash flow and enhance monthly cash flow management and predictability.  

On your cash flow statement, lease payments are split between principal and interest. In certain circumstances, leasing also provides a tax advantage, as some lease payments are tax deductible. As with all tax issues, contact a tax professional to understand the impact a leasing arrangement will have on your tax liabilities.

Adjust Your Payment Terms

For certain goods and services, you can begin charging a certain percentage up front instead of allowing the full balance to go to terms such as 60 or 90 days. For some customers, you may want to keep friendly terms. But for new clients, you can start to adjust your terms, and certain amounts will be required to be paid at the time of delivery.

This won’t work for all businesses, but it is becoming more common in many cases, and you can immediately start to improve your cash flow situation. As an option, you can offer certain discounts to customers who accept paying a certain amount upfront.

Doing this allows you to keep your new payment terms as an option instead of mandatory. Customers may feel uncomfortable if new terms are forced upon them. Offering a discount or other incentive keeps everything optional and is attractive to price-sensitive customers who are in a strong cash flow position.

Delaying Payables Strategically

Previously, we mentioned methods to get paid faster from your clients. On the other hand, you may want to strategically delay your payments to suppliers and vendors to improve cash flow.

Strategically delaying payments doesn’t mean falling behind or becoming delinquent on obligations. Instead, it involves restructuring arrangements or terms or using your available options to free up immediate cash reserves.

Part of your strategy should include when your cash flow will improve. For example, if you have several projects reaching completion that will lead to an influx of cash, you can delay certain outgoing payments to keep your cash flow healthy until you receive your influx. Even if you are hit with minor financing charges, postponing the payment will generally work better for you if your goal is short-term cash flow improvement.

Another option is simply negotiating better payment terms with vendors and suppliers. If you’ve been a long-time customer, most suppliers will work with you to adjust your terms if it means they maintain your regular business. Just remember, you don’t want to wait until the last minute to try to adjust terms. This means don’t wait until you are experiencing cash flow difficulty before contacting your suppliers.

This puts you at a disadvantage in any type of negotiation and limits your options. Switching terms with a supplier can sometimes take a little while from when you mention it to a sales representative until they return with a counteroffer or option. If you keep a close eye on your cash flow metrics, you can spot possible problems coming in the future, so you can start renegotiating terms now.

Raise Prices & Rates

Raising prices is a highly contested topic in today’s inflationary environment. Consumers are being squeezed, and producers are dealing with the same higher costs. However, raising prices is often necessary to alleviate cash flow problems. Improving profit margins is also necessary if your production costs have increased. The trick is to not wait too long before implementing them.

Once again, this is why cash flow trend analysis is so critical. By staying on top of your trends, you can gradually increase prices as you forecast upcoming shortfalls. Smaller price increases are tolerated better by customers than large swings in prices.

Another tip when raising prices is to accompany price increases with a reason that customers can understand. You don’t want customers thinking that they are the only ones being suddenly charged more.

Another strategy to soften the blow of increased pricing is offering different bundles or service options so customers can regulate their spending. This will take some research and is industry-specific. But look over your offerings and find ways to give customers more value and options despite raising costs.

You don’t want to overwhelm or confuse customers with drastically different pricing models. However, offering a few options can help when raising prices so customers don’t feel as though they are being taken advantage of.

Finally, price increases are often a case of trial and error. Businesses often need to test what customers will tolerate. So, starting with a smaller increase and then keeping a close eye on your overall sales metrics is critical to finding the perfect balance.

Reducing Overhead Costs

Similar to price increases, reducing overhead costs and optimizing operating expenses can improve your cash flow situation. Your cash flow statement should give insight into where to start cutting business expenses.

Sometimes, business model adjustments for cash flow optimization are necessary to address increasing costs. For example, if the market has changed or suppliers are no longer available, you may have to adjust your overall model to maintain cash flow.

Managing Inventory For Cash Flow

Inventory can take up a lot of your cash resources. Whether you spend cash reserves on inventory or are paying financing costs, holding extra inventory is overall cash-negative in most cases. However, you don’t want to dump inventory just yet. Supply chain issues and other disruptions have made certain inventory storage techniques more fashionable in today’s environment.

To develop a strategy, carefully review your sales metrics and see what areas of your inventory or supply chain you can improve. There may be certain items or raw materials you can cut back on if they have higher storage costs and lower sales volumes or margins.

On the other hand, you may find that increasing your inventory of volatile items can help you lower your costs if you can stock up during low-cost periods. The key to smart inventory management is to always use data-driven decision-making.

You may believe that certain items need to be held in stock due to historical evidence or past experience. However, the business environment may have changed, and those items are no longer as crucial to your operations. Using sales and inventory metrics will allow you to find the exact areas where you can free up cash through smart changes in your inventory management.

Check Business Credit Before Offering Terms

It’s always tempting to offer terms when landing a new client or closing a deal that you’ve fought hard for. But if that customer is late on payment, it dramatically impacts your cash flow month after month. 

When offering terms to new clients, make sure to perform a business credit check. A simple business credit check can help determine whether you’ll be paid on time. This doesn’t mean you can’t still offer terms or financing if the client has bad credit, but just adjust the terms accordingly to protect your cash flow.

Build A Cash Reserve & Cash Reserve Management

A strong cash reserve doesn’t happen automatically because your sales are strong. Not having a goal or strategy to build cash reserves means that any new revenue you generate will likely be used elsewhere. If you want to build cash reserves, it needs to become a goal. Like any goal, you want to break it down into individual steps and milestones.

Using some of the techniques we’ve already listed should help you improve your cash flow. Once you see improvement, review your metrics again to see how much you can dedicate to your cash reserves. 

The total amount of your cash reserves, or how much you set aside each month, will vary between businesses. Budgeting for cash flow optimization can take up to a year. However, once you start building your cash reserve, you want to also focus on replenishing it if you use those funds for emergencies or investments.

Another option is to establish a business line of credit. Business credit lines or other short-term financing options are an easy way to boost cash flow. New credit is available when you pay back your borrowed line of credit. So, as long as you use your line of credit wisely, it can boost your cash flow without drastically increasing your debt.

Leveraging Technology For Cash Flow Management

The faster you get paid, the faster your cash flow situation will improve. At ECS Payments, we offer the latest digital payment solutions so businesses can get paid at lightning speed and with the lowest costs possible.

We offer fully integrated payment gateway features so you can automate your invoicing and billing processes. This saves time, reduces labor costs, and gets your money in your account as fast as possible.

We also offer the most extended payment options, so you have options available regardless of your customer’s choice of payment.

Contact ECS Payments to learn more about our integrated payment solutions and how they can help you solve your cash flow problems and lower your processing costs.

Frequently Asked Questions About Improving Business Cash Flow